Mostly Economics

Worldwide, there is lots of talk about central bank independence but very little on their accountability.

Anantha Nageshwaran in this piece rebukes RBI for speaking out of turn in recent monetary policy:

On 7 February, the Reserve Bank of India (RBI) held its sixth bimonthly monetary policy meeting, and the last for the financial year ending March 2018. Coming within a week of the finance minister presenting his budget for 2018-19, it was expected to give us clues about what the RBI thought of the budget and its growth and inflation implications. Separately, stock markets around the world—even in places where the government of the day had not imposed any tax on long-term capital gains (LTCG)—had declined. Fear and uncertainty were beginning to creep back into minds long lost in complacency and risk-love. It was not the occasion for the central bank to strut its anti-inflation credentials. To its credit, the monetary policy committee left interest rates unchanged and said that it was sticking to its neutral stance. That is as it should be.

However, in the press conference that followed the meeting, the RBI governor proceeded to mar this near-blemishless conduct. When asked to comment on whether the investment slowdown in India had ended, he said India faced five different taxes on capital, including the LTCG tax, and that this state of affairs would certainly affect investment. Thus, the governor made an unacceptable foray into fiscal policy, which is the domain of the elected government. In fact, one could even argue that the answer was wrong because the question was about the investment slowdown in India at the margin in the last few years and not about the factors that influenced capital formation in general.

First, the finance minister has just proposed the LTCG tax in the Finance Bill. It is yet to be voted upon by Parliament. The matter is thus “sub judice” and, in that situation, it was wrong on the part of the governor to comment on it.

Second, most of the taxes he mentioned have been around for years, if not decades. Only the LTCG tax on stocks has been reintroduced.

Just like a finance minister is criticised for speaking on monetary policy, similar thing applies to RBI Governor as well. And that too much is out of context.

But this arrangement of a central bank not being accountable suits the government as well. During demonetisation, RBI chose not to answer most public queries and hide behind the government decision. Infact, the central bank even refused to answer queries in Parliament. I mean as a monetary authority of the country, it should have told the public why it chose to usher the decision at such a large scale. Infact,it even chose not to respond to several RTIs citing some or the other legal excuse.

It was this very role of being monetary authority, the earlier RBI chiefs refused government that it will not demonetise. This led the governments to pass the decision through ordinance route.

So not being accountable cuts both ways.

Anantha says (and rightly so) that we should heed lessons from advanced country central banks:

Advanced nations have been ill-served by placing central banks, central bankers and monetary policy on a pedestal. India should avoid repeating that mistake. Public interest will be better protected if experts and commentators hold the RBI to the same standards that they apply to the government.

Central banks are very odd institutions in the overall institutional setting. Earlier one focused on their decisions and now every word matters. They should be far more accountable than they are currently. But that is never the focus…